PUTRAJAYA (Aug 14): In a landmark judgement involving sales tax exemption by the Royal Malaysian Customs Department, the Federal Court has ruled that the interpretation of such tax exemptions given to manufacturing companies should be viewed narrowly or strictly in its provision.
A five-member bench, led by Federal Court judge Datuk Zabariah Mohd Yusof, said the onus lies on the taxpayer (manufacturer) that wishes to claim tax exemption to establish that it has satisfied the requirements and falls within the exemption.
The taxpayer, whose supplies would otherwise be taxable, is to establish that it comes within the exemption, so that, if the court is left in doubt whether a fair interpretation of the words of the exemption cover the supplies in question, the claim to the exemption must be rejected.
“In cases of ambiguity, a taxing statute should be construed in favour of a taxpayer. This, however, does not apply to a provision giving a taxpayer relief in certain cases from a section clearly imposing liability,” she said.
Zabariah chaired the five-member bench that also consisted of Federal Court judges Datuk Rhodzariah Bujang, Datuk Abu Bakar Jais, Datuk Hanipah Farikullah, and Tan Sri Harmindar Singh Dhaliwal (who retired in April), in the Customs Department director general’s appeal against Hong Leong Yamaha Motors Sdn Bhd.
Zabariah also led another five-member bench that also consisted of Harmindar, Rhodzhariah, Datuk Abdul Karim Abdul Jalil, Abu Bakar, and Hanipah in hearing the appeal by Wintercorn Malaysia Sdn Bhd against the Customs Department.
In both decisions, the apex court ruled in favour of the Customs Department, as it allowed the department’s appeal against Hong Leong Yamaha, to impose a RM27.96 million bill of demand on the company, and dismissed Wintercorn Malaysia’s appeal over having to pay RM3.697 million in tax after its sales tax exemption application was dismissed by the department.
The Court of Appeal gave contrasting decisions in both cases, where it allowed a judicial review by Hong Leong Yamaha to quash the bill of demand, but another panel ordered Wintercorn Malaysia to pay the sum.
The appeal by the Customs Department against Hong Leong Yamaha, which assembles motorcycles below and above 250cc, concerns the interpretation of the provisions of the Sales Tax Act 2018 and the Schedule of the Sales Tax (Persons Exempted From Payment of Tax) Order 2018 (P.U.(A) 210).
In the department’s appeal regarding Wintercorn, it wanted an interpretation of Schedule A of the Sales Tax (Persons Exempted From Payment of Tax) Order 2018 (namely P.U. (A) 210).
Taxpayer must ensure compliance, exemptions are interpreted narrowly
In the decision on Hong Leong Yamaha, Zabariah ruled that taxpayers claiming tax exemptions must demonstrate compliance with specific requirements to qualify for it, and the onus is on taxpayers to prove eligibility for tax exemptions.
Citing case laws, she said that if there is doubt regarding the interpretation of exemption provisions, the claim must be rejected.
“Tax exemption provisions are to be interpreted narrowly and strictly, as established by various court rulings,” she added.
Citing the News Corp UK & Ireland Ltd versus Revenue and Customs Commissioners 2023 case, she made it clear that the narrow interpretation was the correct one, as it is consistent with the need to interpret the exemption strictly, the fact that its subject matter was financial transactions.
The dispute in the Hong Leong Yamaha case, the top judge said, revolves on the proper interpretation of the words “finished goods [of any] registered manufacturer”.
She added that for manufacturers of “tax exempted finished goods”, since the end products are tax exempt, they are not eligible to claim any tax exemption at the production stage.
“To allow such a manufacturer to claim tax exemption at the production stage would be inconsistent with the basic concept of sales tax being a single-stage tax,” she said, adding that the appellate court had erred in its interpretation of the exemption provisions and tax charging provisions.
Wintercorn Malaysia case
With regard to the Wintercorn Malaysia case, where the company is involved in the trading of edible oil products, and not manufacturing them, the tax exemption for packaging materials was denied by the Customs Department, and Wintercorn was issued with a bill of demand of RM3.697 million in unpaid sales tax.
In the decision, Zabariah found that there was no ambiguity which excludes packaging materials for traders.
“Tax exemption provisions must be interpreted strictly, and Wintercorn failed to prove eligibility. Following that, we uphold the Court of Appeal’s decision to reinstate the customs bill of demand,” she said.
In both cases, the two companies were represented by S Saravana Kumar, together with Lim Chinn Wei and Dharshini Sharma from Messrs Rosli Dahlan Saravana Partnership, while Senior Federal Counsels Rahazlan Affandi Abdul Rahim and Liew Horng Bin, and Federal Counsel Nur Atirah Aiman Rahim appeared for the Customs Department.